I Inherited a Large Sum of Money - Now What?
About 20% of Americans receive an inheritance, a category that includes 21% of millionaires. On average, inheritors receive $110,050. Some people, however, inherit large sums of money in the high six or seven figures.
If you have received an inheritance — or expect to — you may be feeling a swirl of emotions. It can be exciting to suddenly have assets dropped in your lap, but also overwhelming to figure out the best way to use them. Investing a large sum of money is a big decision and one that should not be taken lightly.
In this article, we'll discuss some of the ways to invest your newfound wealth so you can make the most of your inheritance.
What is Inherited Wealth?
As it sounds, inherited wealth refers to the assets and property received from a deceased family member or loved one. It can include cash, investments, real estate, personal property, artwork, jewelry, antiques, collectibles, cars, or other assets that the deceased owned before passing away.
Managing Inherited Wealth
Like any other resources, the money we inherit can be a powerful tool for good — or a influence for our personal downfall.
Let's explore three general practices for managing inherited wealth:
Stewardship
Our resources are entrusted to us. We are often accountable to someone, whether it's God, a spouse, or kids. As Christians, we are called to be faithful stewards of all God's gifts, including any inheritance we may receive. Therefore, we are called to manage our wealth with care, in line with our values, and for God’s glory.
Responsibility Over Reactivity
Is our inheritance going to benefit the lives of others or just our own? The temptation is to go out and spend it on the first thing that comes to mind. In fact, the world is constantly telling you to do so and bombarding you with the next best thing. When you inherit money, fight the urge to spend it immediately. If you’ve just lost someone close to you, odds are you’re in no shape to make large financial decisions. Philippians 2:3 says, "Do nothing out of selfish ambition or vain conceit. Rather, in humility, value others above yourselves." We must be careful to use our money in a way that honors God and serves His purpose.
Generosity
In order to be generous, we often need the right perspective. Generosity is a condition of the heart (Matthew 6:19-21). We should not hoard our wealth or devote it all for selfish reasons but instead, we can share it with others in need. Whether through charitable donations or simply helping out our friends and neighbors, we are called to be generous from what we have been given. After all, as Jesus said in Luke 12:48, “From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked”. Our generosity can be evidence of God’s love and many blessings - we give because he first gave.
With those practices in mind, let's talk about what to do with the assets you've been bequeathed.
What Do I Do if I Inherited Cash?
You have three main options — spend it, save it, or give it to charity. You may want to do all three of these.
Pay Off Debt and Build Up Savings
One of the best ways to use your inheritance may be to pay off debt. If you owe a credit card company, education lender, auto loan service, mortgage company, or any other lender, consider using the debt snowball approach.
This method often involves paying off your smallest debt first, then gradually working your way up to the bigger debt balances. Once you’ve paid off your smallest balance, take the amount of money you were paying on that debt and apply it to the next one, and so on.
From there, the key is to avoid going into further debt.
It’s also important to make sure you have an emergency fund saved up in case of unexpected expenses or life events. Consider using some of your inheritance to create or build up a 3-6 month emergency fund.
In short, inherited wealth is a great opportunity to pay off debt and build up your savings. If done responsibly, it can set you up for a much more secure financial future.
Invest Your Inheritance
Investing can be a terrific way to help your inheritance grow over time.
Funding a retirement account like an IRA, Roth IRA, or 401(k) may be the simplest way to help you get the most out of your money in the long term. While you can’t use your inheritance to fund a 401(k) account directly, you may be able to supplement your income which would allow you to increase your 401(k) or deferred compensation contribution amounts. However, retirement accounts typically come with strict rules regarding if and how much you can contribute and when you can withdraw your funds. So if you are inheriting a large sum of money, these accounts might be just a small part of what you decide to do.
You may also consider opening a taxable investment account. Similar to retirement accounts, these accounts can hold a variety of investments, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), certificates of deposit (CDs), and cash. .Your wealth manager can help you set this up, or you may choose to do so on your own utilizing an online tool or discount broker (such as Vanguard or Charles Schwab)..
Real estate is another option for investing your inheritance. It may provide a steady source of income from rent and the potential for appreciation over time. As with any investment, make sure you do your research and understand the associated work and costs before you make any major decisions.
Spending Your Inheritance
It's okay to enjoy your inheritance. After all, God provides things for us to enjoy. However, that is not permission to go wild, be materialistic or become obsessed with things. God cares how we live, that includes how we use our money, but he also gives us permission to enjoy life (1 Timothy 6:17). Spending your inheritance to fulfill your goals is not wrong, and that might mean you should buy that car or take that family trip, but be intentional with your inheritance and involve God in the decision making process.
Create a Legacy of Generosity with Your Inheritance
Giving to others can be incredibly meaningful. You could donate a portion of your inheritance to organizations that support religious missions, education, animal welfare, healthcare, poverty relief, or environmental protection.
Charitable giving can also provide opportunities for family bonding and be used as a teaching tool to pass down values and develop a sense of community with the next generation. Involve your family in your giving: who you choose to give to and why. You can discuss the importance of generosity and help children understand the impact their donations can have on others.
If you’re looking at giving a large amount to charity include your advisor in the discussion. There may be some tax-smart giving strategies you can take advantage of.
By using your inherited wealth to give back, you can make a powerful contribution to the Kingdom and may leave a lasting legacy for generations to come.
What do I do if I Inherited Real Estate?
When you inherit a house or other real property, you have three basic choices — sell it, rent it to someone else, or live in the home yourself.
Sell It?
If you decide to sell it, you may be liable for capital gains taxes on the profit from the sale. You’ll be taxed on the gain (the difference between the cost basis and the sale price). However, you can take advantage of the step-up in basis when calculating the taxable gain which often can eliminate any taxation that might otherwise be due if sold in the future.
This means that the cost basis for the property is reset to its current market value as of the date of death, so you may be able to reduce or completely eliminate your tax liability if there has been significant appreciation. The step-up in basis can be a great deal for anyone who inherited property and decides to sell it. As always, you should talk with a tax preparer or financial advisor before making any financial decision that could affect your taxable income.
Rent It?
Renting out the property can provide a nice steady income. Just make sure that you are prepared for the work that goes into being a landlord before taking this route. Alternatively, you could consider hiring a management company.
You may also want to maintain a savings account for your rental and factor in expenses like maintenance costs, vacancy, and taxes when calculating your expected return on investment.
Live in It?
If you inherit the house debt free, you might want to move into it. If there’s no mortgage payment, this may allow you to save extra cash each month. Don't forget, though, that you will be responsible for any repairs or renovations you need to make along with home maintenance costs.
If you live in the house for two or more years, you can sell it and earn up to $500,000 in profit from the sale ($250,000 if you’re single) without having to pay capital gains tax. So if the property appreciates after you move in, you may still be able to significantly reduce your tax liability if you sell it in the future.
Inheriting Other Items: A Car, Jewelry, Artwork, or Collectibles
When you inherit your mom's fine jewelry or your dad's antique car, you not only receive the item but also get the memories and in some cases the emotions attached to it. This can make deciding what to do with your inheritance even more challenging.
You might choose to hold onto them and enjoy them yourself. If that’s the case, you’ll likely want to make sure they are adequately insured and cared for properly.
If you don’t wish to keep the items, you can consider a few different options. Selling them is one possibility. You can do that online, through an auction house, or through an estate sale. You might offer the item to a grandchild, family member, or a close family friend. Alternatively, you could donate these items to a non-profit organization, which might provide tax benefits.
Should You Start a Business with Your Inheritance?
Deciding to sink your entire inheritance into a new entrepreneurial venture can be risky. If, however, you have a strong business plan, have sought wise counsel, and have done your homework, an inheritance may fund your lifelong dream.
Benefits of Starting a Business with Your Inheritance
Owning a business may allow you to follow your passion while also fulfilling a need. It can provide you with the opportunity to have increased flexibility and make more money than you would if you were working for someone else.. You may also gain a sense of accomplishment from creating something from nothing and watching it grow over time.
Risks of Starting a Business with Your Inheritance
The downside is that there’s no guarantee that your business will be successful. Make sure you have a plan in place that outlines how you’ll use your inheritance to get the business started, as well as a timeline for when you expect the business to be profitable.
Realize that with a business comes complexity. You'll want to ensure you and your family are ready to take on that responsibility
What About Inheritance Taxes?
Many people worry about having to pay taxes on the money they inherit. Unless you and your family members receive more than $12.92 million, however, you likely won't have to worry about taxes. If federal taxes are due, they will be taxed to the estate, not to you. The IRS will tax the estate on the amount above the lifetime gift tax exemption amount.
Some states also apply state-level estate taxes even if the federal threshold has not been exceeded. You should consult with an accountant or financial advisor to understand what type of taxes may be applicable to your inheritance.
The Bottom Line
An inheritance can be a great opportunity and responsibility. We always say - don’t make a financial decision in a vacuum; consider your options, goals, and values.
If you have inherited a sizable sum of money, more than a several thousand dollars, you may need a team of experts to help you manage it properly. This team might include a tax advisor, an estate planning attorney, an insurance agent, a real estate agent (if you inherit real estate), and an investment professional. If you’re in this situation, reach out to CWM today - we can help!